Bondholders squeeze GM

Demands in concession talks raise threat of bankruptcy

General Motors Corp. bondholders want more money in exchange for forgiving billions in debt and are threatening to push the struggling automaker into bankruptcy if they don't get it, The Detroit News has learned.

GM has been negotiating with bondholders this week on a complicated debt exchange that would cut the automaker's unsecured debt by two-thirds to $9.2 billion. To get there, bondholders would have to accept about 30 cents on the dollar, which is a requirement of the automaker's $13.4 billion federal loan package.

But bondholders are demanding 50 cents on the dollar, which they say mirrors the value of concessions being negotiated with the United Auto Workers, said people familiar with the talks.

The demands illustrate the challenges GM is facing in its talks with bondholders and raise doubts about whether the company will succeed in cutting its debt and convincing the government it can repay the loans. If GM cannot reach a deal on concessions with bondholders, as well as with the UAW, the government could recall the $9.4 billion GM has already received and effectively force the automaker into bankruptcy.

The bondholders appear to be calling GM's bluff and are arguing that the government could eventually lend the company more money if concessions can't be reached. If GM filed for bankruptcy, however, bondholders that have unsecured debt could get nothing.

A source familiar with talks cautioned that negotiations are ongoing and proposals are being exchanged among the parties.

"GM is working diligently with all of our stakeholders as we restructure our business and work toward meeting the requirements of our loan agreements with the government," spokeswoman Renee Rashid-Merem said. "We remain engaged with advisers of an ad hoc bondholder committee and the UAW in efforts to reach agreements relative to our debt restructuring goals."

The bondholders' argument goes like this: GM's hourly retiree health care obligations totaled $47 billion before the company and the UAW in 2007 agreed to reduce GM's liability to about $35 billion, to be paid into a trust to be run by the union. The company already has allocated $15 billion for that. GM wants to pay half of the remaining $20 billion in cash and half in company stock, which is a target included in GM's loan terms.

But Wall Street views GM stock, which closed Wednesday at $2.74, as basically worthless, meaning the UAW would essentially get $25 billion, or roughly half of GM's original obligation.

The bondholders are demanding that the value of their debt exchange be calculated based on the original $47 billion owed the UAW, not $25 billion, or about 50 cents on the dollar.

"We tend to side with bondholders in these negotiations," JPMorgan analyst Eric Selle said in a research note Wednesday night, adding that JP Morgan is "very encouraged by the pattern of UAW concessions," but they did not equal the sacrifice being asked of bondholders.

The UAW has agreed to end the jobs bank program that paid workers nearly full wages when there was no work.Selle says the government could fund a deal that would give bondholders 10 cents on the dollar in cash and guarantee new notes to be worth 40 cents.

GM and Chrysler LLC, which also got federal loans, must file restructuring plans by Tuesday that show how they will repay the loans, and show significant progress toward becoming viable companies by March 31, or the U.S. Treasury Department could recall the loans.

Bondholder negotiations are more critical for GM because the public company has many junk bonds and unsecured creditors. Chrysler is privately held and most of its bondholders are secured.

A source with knowledge of Chrysler's situation said the automaker's unsecured bondholders represent such a small percentage that a holdout would not scuttle Chrysler's ability to meet the loan terms dealing with public debt.

Lemos Stein said the comparison between the renegotiated terms of GM's union health care obligations and the bondholders' unsecured debt is appropriate.

"The health care liabilities that are also potentially being reduced as part of this plan would, in a bankruptcy proceeding, be unsecured claims, so that makes them similar to the unsecured debt held by the bondholders," he said.

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